Mortgage loan rates have been rising for a year now, and that's bad news for people who have been saving up to buy a home, or waiting for the value of their current home to rise enough to refinance.
Yes, it appears you missed the bottom, and the lowest mortgage interest rates ever.
But that's no reason to feel rushed if you're a potential home buyer.
The good news is that, while interest rates were more than a full percentage point higher in December 2013 than a year earlier, mortgage rates are still near generational lows that make homeownership more affordable.
For home shoppers, I would suggest focusing more on deciding what term, or length, of a mortgage loan best suits their needs.
The average interest rate on a 30-year, fixed-rate mortgage bottomed out at the end of 2012 at 3.35 percent, according to the survey that home financier Freddie Mac has been conducting since 1971. In December 2013, the average rate was 4.46 percent.
For someone borrowing $150,000, the difference in dollar terms is not insubstantial. The monthly mortgage payment at 3.35 percent interest would be $662, while at 4.46 percent interest it would be $757.
That's $95 extra a month, every month for 30 years, so it really adds up.
But instead of regretting missing out on the record-low rates available at the end of 2012, consider this.
Going back all the way to 1971, when the Freddie Mac survey began, monthly average mortgage rates never fell below 7 percent until 1998. Heck, they were in the mid-teens during the early 1980s.
The 30-year rate didn't fall below 6 percent during any one month until 2003, and it wasn't until the Great Recession that rates dipped below 5 percent, in 2009.
So, the long-term perspective is that mortgage loan rates are still in a historic sweet spot that's starting to end as federal policymakers start taking their hands off all the levers they've been pulling to keep rates so low.
I think there's a really good chance that folks who take out 30-year, fixed-rate loans now will be counting themselves lucky in just a few years.
Now, that's not to say that 30-year loans are for everyone. If you can afford the payments, a 20-year or 15-year loan will get you lower interest charges and you'll build equity - the part of the property you own - much faster.
If you take out a 30-year mortgage and then move five years later, it's going to feel a lot like renting, but with more risk. That's because most of the monthly payments go to interest charges in the early years of a long-term loan.
It's not always easy to know how long you'll stay in one place, such as a first home. As we all learned during the housing price bubble collapse, the important thing for financial security is to have enough home equity so that you don't get trapped if a property loses value.
When a property's value drops, it can prevent people from refinancing, or even prevent them from selling, because if a property becomes worth less than is owed on a mortgage, the "owner" would have to pay the difference in order to sell. Large downpayments are one way to ensure lots of equity early on, and mortgages with terms shorter than 30 years are a way to quickly build equity.
Consider the $150,000 loan discussed earlier, with the $757 monthly payment. Over five years, that adds up to more than $45,000 in payments, but just over $13,000 goes toward paying down the loan balance. Figure you'll pay a real estate agent a 6 percent commission to sell the home, and if you move after five years you're about breaking even unless the home value went up.
Maybe values will steadily rise, but better to make conservative assumptions.
Anyway, let's say that instead of a 30-year loan, that same $150,000 was borrowed with a 20-year loan at 4 percent interest. The monthly payment would rise to $909, but after five years the borrower's equity in the house would exceed $27,000, more than double the equity achieved with the 30-year loan.
So, with the 20-year loan, that borrower would pay 20 percent more each month, but would get more than double the home equity over five years. That's great, if the higher monthly payments aren't going to create a financial hardship.
Reach David Slade at 937-5552.
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